AdvisorShares Weekly Market Review – Week Ending 2/24/2017

Highlights of the Prior Week

Mixed Signals From Higher Equity Prices

Macro

No matter what is going on the world there is always a bullish case for equities and a bearish case and now is no different of course. This is an interesting time for how mixed the messages are these days. The most important market signal is equity prices and they continued to march higher last week with eleven days, and counting, of gains (we’d make a Spinal Tap reference but too many people beat us to it). For the week, the Dow Jones Industrial Average was strongest with a 0.95% gain, the S&P 500 went up 0.69%, the NASDAQ added 0.11% and the Russell 2000 fell 0.37%.

The Russell 2000 has lagged the other broad benchmarks this year, gaining 2.74% versus 5.71% for the S&P 500. The relationship of small caps to large caps has historically been important for assessing the equity market cycle. Small caps tend to lead earlier in a bull market and that leadership tends to rotate to large cap later in the cycle. Small cap of course dramatically outperformed in 2016 which is a positive harbinger and while two months of underperformance is a short time period, part of the 2016 small cap rally came from expectations that Trumps policies, if enacted would favor small caps. It is still too early to know which of the campaign promises will be enacted or to know when they will start to have an economic impact. For now, last year’s outperformance may have been borrowed from future expectations. For now, this is a mixed signal from the market.

Bespoke Investment Group provided a recap of the recently concluded 4th quarter earnings season. It prefers to track bottom line and top line beat rates, that is the percentage of companies that exceed expectations. For Q4, 63% of companies beat earnings estimates which was higher than average, and the third highest beat rate in the last five years. The revenue beat rate was 57% which is the highest since 2014. Over the last few years the beat rate for earnings has been generally trending higher while the beat rate for revenue has been generally trending lower which could be evidence of the impact that share buybacks have had on markets during this cycle. With the context of mixed signals, this is probably a positive.

Thursday was a rough one for companies that stand to benefit from possible infrastructure spending under the new administration over concerns that these plans may not be implemented as soon as originally expected. Steel stocks were hit hard with declines ranging from high single digits to low double digits for the day. These stocks, as part of the materials sector tend to be volatile but also cyclical barometers. Where we are talking about mixed signals, this would be a negative.

The yield on the Ten Year US Treasury Note continued its march lower last week to 2.31%, down seven basis points on Friday alone. There are several takeaways from this, we would focus on the negative from the standpoint that a positive outcome from lower yields won’t hurt advisory clients and other investors. Lower yields historically have expressed concerns over things like the economy, political uncertainty or as part of a reaction from an external shock. The drop on Friday began before the President’s CPAC speech but there does remain political uncertainty. Most of the speech was backward looking in nature, devoting relatively little to forward looking policy detail. At some point, markets will need to know what to expect with more precise detail than they currently have. The German bund has been trending lower over the last month down to 0.18%. But to the extent that yields are being driven by political uncertainty, much attention was given to the German schatz, the two year note, on Friday. It has had a negative yield since mid-2014 but has hit a new low last week at -0.958%.

For now, however, domestic equities continue higher, up 10% since the election, and ultimately that is the bottom line.

Representative Bartlett saw a critical infrastructure weakness in the US electric grid. Many times Bartlett rang warning bells about the weakness he saw. Many times his pleas to Congress were ignored. His concerns were that a storm or EMP attack could shut down large portions of our electric grid.

There is plenty of forgiveness to go around for many players. They might not get in the Hall of Fame, but they have an MLB home, and it seems like Sosa does not. Even his Hall of Fame vote sits at a paltry 8.5 percent. Six-hundred-plus home runs? Even if you make a blanket argument against those thought to be PED users, you cannot explain that gap between him and others.

As for the sectors of the S&P 500, six outperformed the broad benchmark – Utilities, Telecom, Real Estate, Healthcare, Staples, and Technology. The remaining five – Discretionary, Materials, Industrials, Financials, and Energy – each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 5.35% for the week ending 2/24/17, with Utilities outperforming all, and Energy coming in last.

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers. AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.